Do Tokenized Real-World Assets Belong in DeFi? | Bhaji Illuminati | Sam MacPherson | Robert Leshner

Awesome. Huge thank you to our last speakers for another really good conversation just on the importance of stable coins and in the reliance that we have on them. Stable coins, you know, are one of the first primitives of RWAs, but RWAs have really exploded in the last year. And so we've got a great panel here to talk about the role of tokenized real world assets belonging in DeFi moderated by Bashi. Please welcome our speakers.

Thank you. Testing. Testing. There we go. We actually switched who the moderator is.

Up until like 20 minutes ago, I was supposed to be the moderator cuz I'm the most OG, but I thought that Bashi would be way better at it. We did an audible in the back room, but we're all going to ask each other questions. We also tried really hard to say, how do we make the vibes here like the vibes back there? So, making it feel like we're actually having a conversation on stage, pushing back, asking each other questions, and not just here speaking into the beautiful void. Um okay, so shall we do that?

Let's do it. Do we need an introduction or these guys they speak for themselves? Introduction? All right. Uh maybe maybe I'll do one.

Um hey, I'm Sam, CEO of Phoenix Labs. Um we work on Spark, which is attached to the Sky ecosystem formerly known as MakerDAO. So, our responsibility is connecting liquidity from Sky USDs into the broader DeFi ecosystem. I'm Robert. I founded Compound, one of the earlier DeFi protocols, and today I'm the founder of Superstate, which is bringing RWAs on chain.

And I am Bashi, CEO of Centrifuge, so also bringing RWAs on chain. So, one of the things we also talked about back stairs back stage was how do we create tension amongst this group and push each other and ask good questions cuz we all pretty much believe the same exact thing. RWAs are the future. They're the future. Um so, then we thought, "Okay, well, let's just create some definitions."

So, let's say what is an RWA? Yeah, so my perspective of an RWA is really simple. If it derives its economic value from the offline world, it's an RWA. And if it derives its value from the on-chain world, it's a crypto native token. Yeah, so I I it's a pretty good definition actually, but uh like I I think I slightly disagree where um like to me an RWA is anything that's custodied, there's a custodian backing it off chain.

So, under this definition, basically actually everything is an RWA except for the native token and meme coins basically or DeFi native tokens I think would be another exception, but when we're talking about like high scale, um yeah, so on Ethereum for example, you have ETH, which is the native token, LSTs, I would count this all as non-RWAs, but something like WBTC because it's custodied off chain, it's still a crypto native asset on Bitcoin, but because there's a custodian, to me that is also an RWA. So, everything's an RWA. Yes. Almost everything. So, what's the potential market size of RWAs?

Uh 700 trillion or so. Quadrillions. Why do you think right now on chain stablecoins aren't viewed as RWAs? I mean, they're definitely RWAs, right? Like you basically have like a dollar of stuff that sits at a bank or a brokerage account off chain and you have a dollar token on chain.

They're definitely RWAs, but because they were the first ones and they sort of like preempted the phrase RWA, we know them as stablecoins. I mean, if you squint, they're really no different than like tokenized anything. Um I just think they get their own little class because they came first. Do you know who came up with the term for RWA? I don't know.

Someone I heard it means risk weighted assets. No, it means really wild animals. That's the hoodie in all of us. Okay. So, then when we think about what the A is, assets or animals, depending on who you ask, right now obviously there's a lot of there's product market fit for dollars and T-bills.

What hap- like why is it more interesting for treasuries to be on chain than off chain? Yeah, um I think well the the primary buyer of T-bills is um well actually it's USDs actually in particular. Oh. Yes. The only buyer is that right?

it's precisely because the majors fiat-backed stablecoins USDC and USDT do not forward the risk-free rate. And so there's a natural tension there to get access to that yield. And so this is precisely why the we've seen huge amount of growth in in T-bills especially when the interest rates went up. Um like when the interest rates go back down though and they they will, it's going to be interesting to see. I I think there's going to be more and more going down the risk curve of bringing more online.

Like corporate debt seems to be next likely candidate. And like I can speak from Sky's perspective as a whole, this is something we'll almost certainly be investing in to increase the yield beyond just treasury bills. Do Do that the tokenized version of a treasury is in will ever be interesting for off-chain capital or is it just targeting on-chain capital? Well, yeah, I mean I I definitely think that boring old off-chain investors will eventually reap the benefits of on-chain DeFi protocols that make RWAs that are bridged onto a blockchain more liquid, more transferable, more programmable in general. It makes the old boring asset more appealing.

It's just going to take a while to build the tools and the interfaces for the off-chain folks to be able to interact with on-chain things. Yeah, I completely agree with that. I think like right now the the specific use case of moving funds on chain and then parking them in T-bills and doing nothing, you know, who's doing that? That doesn't make any sense. But, like fundamentally the rails of DeFi are what's important.

So, being able to collateralize your positions, take loans, trade on DEXes, this kind of stuff. That's what's going to unlock the true value and it's kind of like you know, it's it's it's a little bit of a chicken and egg problem, but we just kind of got to work on making the entire ecosystem better and I think just naturally it's it's it's inevitable in my view. Everything's just going to be tokenized and just due to the capital efficiency improvements in DeFi. We mentioned corporate debt after T-bills. What about some other more like illiquid stuff?

Like what do you think about real estate? Well, I mean real estate were some of the first attempts at RWAs. None of the real estate projects early on had much demand for the asset. Tokenizing something doesn't increase the amount of people that want to own it. It just makes it easier to transfer the ownership around for the people that do own it.

So, a lot of the early real estate tokenization and RWA things were not really that successful cuz tokenizing some building in, you know, Denver it doesn't change how many people want that building. And so, I think real estate's actually incredibly interesting if you look at it more the way a lot of like traditional investors do, which is like as a REIT or as an index of like the space and not as like individual non-fungible assets that are brought on chain. So, I think eventually we're going to get to the point where there's like actually like the equivalent of REITs on chain that are tokens, where it's like, "Oh, you have broad exposure to real estate in general. It has different like risk and return characteristics than T-bills. It looks good if you're a protocol, cuz you can like build really interesting stuff around it."

But, we're not going to have like individual assets that are super esoteric. We're going to have big pools of fungible real estate. Yeah, and I mean, this will be great for lending protocols, cuz right now, um, you know, apart from getting the risk-free rate, the only yield source is speculation, um, primarily on Bitcoin and ETH. And so, finding, you know, sustainable long-term yield sources is going to be super important. And, uh, you know, housing is, uh, very obvious example of, you know, it's a real thing in the real world doing real things, productive asset.

Um, so, tokenizing this, I think, will be really great for the space. What do you think are some other future use cases for tokenization as it relates to asset classes that aren't currently on chain? Well, I mean, eventually everything, right? So, like right now, 700 trillion dollars of stuff is recorded in spreadsheets, is recorded on physical paper contracts sitting in filing cabinets, it's recorded in like databases, it's all different file formats, essentially. And eventually, like in a 20- to 30-year time frame, all of that's going to be recorded on blockchains, which is just a better file format to record ownership than the way it all works today.

So, the easy answer is everything. Like whether it's like stocks or bonds or real estate or commodities or currencies or, you know, weird alternative things, private funds, everything. Everything will be recorded using tokens instead of being recorded in like law firm back offices. Yeah, I mean, we're just agreeing about everything pretty much. Yeah.

Yeah. Yeah. Yeah. Um okay, then switching gears a bit, the meme of the space has always been the institutions are coming, the institutions are coming. So, are the institutions here?

Yeah, I mean, I'll just speak for Superstate and the products that we've built so far prior to like having built up really interesting like DeFi integrations and like protocols and DAOs using our products. Right now, today, we have 400 million or so of, you know, assets. 90-something percent are institutions. It's all institutional investors and capital that owns our products. So, we don't have any like retail users of our products.

They're not offered to retail. You know, 90-something percent of our usage today is institutions. Yeah, um from my perspective, um if you like companies like Superstate, um kind of got like coming in from the TradFi side, but we're all trying to build this bridge so that we're no longer calling it DeFi, TradFi. It's just finance. And so, what we're doing um on the Spark side is uh we have on-chain um variable rate lending, you know, that's that's a big use case.

We've been uh doing that for a while, but not everybody is comfortable coming on chain yet. So, it's important to provide uh liquidity um to users who maybe want to use a custodian um off chain to borrow stablecoins. Uh that's perfectly valid, and um just increasingly we're interested in catering to all these different use cases, and um institutions in particular are not quite ready to come on D5, but that doesn't mean we can't still get the benefit of of them um coming towards the chain. What are the building blocks we're still missing? I mean there's quite a bit, and it's like all across the stack.

So, it's like and but everybody's working on it. Like I think it's just like an engineering problem that's that's going to get solved. be the the D5 guys that are working on it or the TradFi guys that are working on it or the seriously, we all need to work together to make this happen, and I think that's happening. And then like I've seen just huge change in the past like couple years. Um like just with things becoming legitimized in TradFi, and uh yeah, so like from so, as I mentioned before, like for us, like making sure we cater to all these different users, you know, potentially people want to use the custody solutions.

Um that's fine. Um as well as wallets, um UX, um yeah, just in general. Um maybe this this is for like regular users more. Just making the experience uh a lot better. Um but there's so many great projects that are are working on this.

We hear about regulatory tailwinds in the US and the tide shifting. Uh you were you started in the US. You made a bet a couple years ago. It's pay paying off. What are you seeing as the shifting um like pull that you're getting from the new administration, and what are some of the specific regulations that we can expect in the near term?

Yeah, I'll I'll preface by saying I think we're going back to where the world should be um coming off of a moment in time where the world was not what it should be. Like when I decided to build Superstate in the US for US institutional investors under US regulations, 18 months ago, everybody said like that guy's crazy. Like why would you want to do this? America hates you. Like building in the US sucks.

And it does suck. Under, you know, the Gensler SEC, under, you know, certain facets of the Biden administration, crypto in the US over the prior 4 years really has sucked. It It was an incredibly challenging environment to build from. And it's not that suddenly like it's like, you know, "Oh my god, you know, there's no rules. Like let's go wild."

It's like, no, we just no longer have a hostile and oppositional headwind to build in US. There's still rules. There's still the same rules there's been probably like forever. It just those rules aren't being used to wea- They're not being weaponized against good actors to undermine an industry. The rules are just boring and they're there.

And we now have an administration in general that is open-minded about people experimenting and trying new things knowing that there are rules, but that, you know, the purpose of technology in general and the purpose of regulation in general is to reach a better end state. To reach one where markets are faster and more efficient and more fair and more transparent. And that's all of the things that RWAs and DeFi are fundamentally. And so, I think we're finally at the point now where regulators are extremely excited about the advantages of DeFi as opposed to being afraid of them and trying to undermine them. Yeah, it's I mean, it's kind of interesting like the US should be embracing crypto because it's a huge boon to the the debt problem that's going on in the US.

The stablecoins in particular are one of the largest buyers of treasuries and US debt. So, like this um and it it's encouraging to see this has kind of shifted. You see it in like um Congress, some Congress people, senators now talking about stablecoins as a huge opportunity. And, you know, regulation is not something that should be feared. It's actually, when it's done right, it's actually super useful.

Like, um there are complete scammers out there and, you know, bad actors. And as much as we can do, you know, without infringing on people's uh like uh rights to make their own decisions, um you know, providing these uh protections, uh I think can be if it's done right, uh it is is super useful and will be help a lot to legitimize uh the space and uh help it grow and really change, revolutionize uh finances as we know it. Take a shot every time someone uses a buzzword. Um okay, but what about regulatory capture versus regulatory clarity? How do we ensure that as there's various organizations with various uh outcomes that they're looking to achieve that have various levels of influence uh for the administration, how do we ensure that the decisions that are made now set us up for success in the long term?

You want to start with that one? It's a hard question. Solve the problems. Um sorry, can you repeat? There's like the the like circle versus Tether debate right now is what it comes down to.

And the influence of US corporations as it relates to regulation that's coming out. You can go. All right. I mean, this is a hard question. I think it's like above my pay grade in a sense.

But, you know, I think right now there is sort of like a we'll call it arms race happening behind the scenes to influence where policy goes, where legislation goes, and where, you know, the industry as a whole goes. And there's extremely large, you know, incumbents both in the TradFi world and in the crypto world that all have an opinion about this stuff. And crypto's not special. I think every industry that's ever existed in America has gone through this in one way or another. and there's always new technologies that come and like change the way that the world works and so I don't think this is a new phenomena.

I think this is just something that like we in this room are starting to pay attention to because the moment is upon us. Yeah, and I I think it's actually I would I do not want to live in a world where there's only one a stablecoin. I think it's important that if only to like prevent sort of like this capture of the entire market. So having both USD onshore offshore dollars is actually I think useful. How to deal with the regulatory side with Tether is is interesting and I mean you know I I don't know exactly how that's going to work, but I think in the example I think of March 2022 was it or the the USDC event where the US government was actively trying to debank a lot of uh I think it was 23.

Was it 23? Yeah, sorry. Yeah. So operation Chokepoint 2.0 this whole thing and so I think having this hedge where all of a sudden everybody's going to Tether and this is probably less good for the US to have most of the dollars being in offshore dollars kind of protects the industry against these types of attacks in the future.

Okay, we're almost done. I'll I'll switch it to a slightly different topic which is the demand side. So stablecoins and Maker has been a primary driver of demand for RWAs since the very early days. Where do we see the next demand drivers coming from? Well, I think it's going to come from the next hundred protocols that get built.

I think it's going to come from more and more retail and institutions moving on chain and bringing their capital there and I think it's going to come from you know the gap between TradFi and DeFi going away entirely and people saying you know on the traditional finance side like, "Okay, this is really interesting." Yeah, so the growth of the market for stable coins, right now their market size is about 15 billion or so and it's mostly within Sky, Ave, and Athena has captured most of the yield-bearing stable coin size. So, to grow the space, we need to like grow the pie and so what we're very interested in is launching an ETF. So, we we think getting over-collateralized crypto-native vaults is like a very compelling product that you're able to access the fairly high rates in bull markets and we think this is something that you know, more traditional investors may want exposure to. So, you know, we've got a Bitcoin ETF, we've got a ETH ETF, you know, maybe we'll have a SOL one soon, but stablecoin ETF is I think the next thing, yeah.

All right, you guys, you heard it here. We need 100 more DeFi protocols and we need an ETF. Go build it. so much for joining. Thank you guys for sharing the stage with us.